Highlights

• Improving signs. We attended WCT’s 1QFY16 investor’s briefing which was hosted by its Executive Director, Kenny Wong. To recap, FY15 core earnings of RM32m (+117% YoY) was within expectations, largely driven by a recovery in its construction division which saw both topline growth (+51% YoY) and margin expansion (EBIT: 7.1%). Management guides that margins should further improve in 2H once contribution from its newly secured infra jobs (>70% of orderbook) kicks in.

• Healthy orderbook level. WCT’s orderbook stands at RM3.8bn, implying a healthy cover ratio of 3.3x on FY15 construction revenue. Management continues to guide for RM2bn in new job wins this year (YTD: RM134m), against our more conservative target of RM1bn.

• Sizable highway jobs on the cards. Management shared that it has submitted 2 bids for DASH and 4 for SUKE. Each of these packages is worth RM1bn on average. It will soon be tendering for 4 packages of the Pan Borneo Highway (Sarawak) via a JV with KKB Engineering whereby WCT will hold a 30% stake. Judging from the awards thus far, each package should be worth RM1.5bn, attributing RM450m to WCT if successful.

• Decent bookings but… WCT’s unbilled sales stands at RM551m (1.7x cover on FY15 property revenue). 1Q sales totalled RM68m and management maintains it RM600m sales target for FY16 vs ours of RM350m as we remain cautious on the soft property sentiment. Bookings for the Waltz in Paradigm Garden City, OUG has been decent at RM137m but the key here is conversion to actual sales.

• De-gearing route. WCT has mapped out several de-gearing initiatives which are (i) disposing 50% of its Serendah land, (ii) sale of earmarked land and buildings, (iii) proposed private placement, (iv) “REIT-ing” its investment assets and (v) listing of its construction arm. If successful, this would raise total proceeds of RM2.1bn and cut WCT’s net gearing from the current 81% to 40%.

Risks

• Derailing of its de-gearing plans.

Forecasts

• No changes to forecast as the results were inline and the briefing yielded no significant surprises.

Rating

• Maintain BUY, TP: RM2.12
• We expect WCT’s earnings to see a reversal of fortunes this year, underpinned by its sizable orderbook. The impending listings of its REIT and construction arm are tell-tale signs that a positive earnings momentum is forthcoming.

Valuation

• Our SOP based TP of RM2.12 implies FY16 P/E of 22x but this reduces to 16x in FY17 once earnings kick in.
• Valuation is also backed by RM1.6bn in net surplus value of its land (RM1.31/share).

Source: Hong Leong Investment Bank Research - 27 May 2016